DO BILLIONAIRES NEED AN EMERGENCY FUND?

Versailles Mansion – David Siegel Builds the Biggest House in America

“The Siegel’s had to stop construction on Versailles three years ago when financing for Westgate Resorts faltered, putting the company and their personal fortune at risk.” from Susan Berfield, BloombergBusinesssweek, March 15, 2012

How could David Siegel, billionaire owner of the largest time share company in the world, Westgate Resorts not have back up savings when trouble hit? Bloomberg BusinessWeek chronicled his downfall and rebound last year in “Versailles, the Would be Biggest House in America“.

EMERGENCY FUND

Background; What is a Time Share?

As a struggling young married couple living in Southern California, El Carino and I visited many time share presentations. Wooed in by a set of luggage, free meal and a show, or other goodie in exchange for 90 minutes, it was both a source of entertainment and a free meal.

A timeshare is a form of vacation ownership where you buy a week or two vacation in a tony resort in exchange for $25,000.00 plus an annual maintenance fee of up to $700.00 per year. This investment (I use the term investment loosely as it is quite unlikely that you will financially profit from the time share purchase and rarely can you sell your ownership interest for a profit) provides a small apartment in a resort area. You usually buy the same two weeks with December and prime vacation times costing more than off peak weeks. Most owners’ average annual income is about $75,000.00 and they finance their timeshare purchase at up to 15% annual interest. Time share sales teams go after the relaxed vacationers for these impulse purchases. In sum, the sales tactics are powerful and the owner profit’s outstanding.

Why Even Billionaires Need an Emergency Fund

Business was continuing as usual with expansion funded by the profitable business model. Meanwhile, after the timeshares are sold, the property developer bundles the mortgages’ together, securitizes them and sells the new investment products to investment bankers to market to the public. Things were going along great-until they weren’t. In 2008, Siegel couldn’t sell a $300 million securitization and pay off the primary lenders, his credit dried up, and he was in the midst of a huge Las Vegas building project. His funding gravy train dried up in the midst of the sub-prime lending crisis and mortgage meltdown.

What’s a billionaire to do?

He could not pay back the lenders from the initial mortgages since he was depending upon the funds from the securitization for the capital. And there were no buyers for the securitized products. The initial lenders were not happy and Siegel was on the hook for $1.2 billion, with no savings.

His creditors took swift action requesting he sell a dude ranch, mobile home park, and a Ramada Hotel near Disney World. His creditors put he and his wife on an allowance leading to a drastic lifestyle adjustment.

Lessons from a Billionaire Without Savings

Not only are there wealthy folks without savings, there are high income earners plagued with debt and a negative net worth. Without getting into the psychological reasons for this, what does this mean for those of us without a $1,000,000,000.00 net worth?

Add Siegel’s losses to those of lottery winners who blow it all combined with millionaires in bankruptcy court and the examples of financial mismanagement are not hard to come by. What can you learn from their mistakes? Hint; the lesson is not to give up because if the wealthy can’t manage their money, what hope is there for you!

No Matter What Your Income Level is; You Need to Save

Everyone needs some cash to fall back on when hard times hit. And financial setbacks happen to everyone. Not only are the poor susceptible to financial problems, but high income earners who overspend and don’t save can run into financial problems as well. There is research that substantiates the importance of having emergency funds to fall back on.

Siegel sold some assets, scaled back on spending, and continues to pay his debt. He’s on a path to become financially stable again. Yet his story highlights the importance of living within your means and saving for the eventual financial surprise.

Versailles in Florida Update

After a four year respite, construction resumes on The Siegel’s biggest home in America according to abcnews.go.com. Why anyone would want or need a home this big is beyond me, but there is a lesson to the Versailles mansion story. Financial troubles can hit anyone at anytime. No one is immune. If a billionaire can hit the financial skids and face bankruptcy, so can you.

Live prudently and have a contingency plan for disaster. Build up that emergency fund so that a surprise financial set back won’t sink your ship.

Action Steps

Building an emergency fund must be done now. Don’t worry about the amount, just funnel a percent of each paycheck into a separate savings account designated for emergencies. Vow not to touch this money unless there is a financial emergency. No, I don’t mean buying a new electronic gadget or pair of shoes!

Each paycheck, transfer manually or by automatic deposit money into your Emergency Savings Account. No excuses. If you don’t see the cash, you won’t miss it.

What tips do you have for building an emergency fund? Have you dipped into yours recently?

A version of this article was published on March 24, 2012

image credit; google images- gobankingrates.com

28 Comments

Hasn’t Donald Trump had this same issue a time or two? I would guess that it isn’t that they don’t have the money, but they have it all tied up. You would think they would leave some liquid, but I guess they can’t resist the temptation of trying to make more money.

One problem with businesses, such as Siegel’s, is they try to maximize the use of capital and increase ROI for investors. That often means a lot of leverage and liabilities. If investors paid more attention to the balance sheets, corporations would maintain larger reserves.

Everyone wants to hit a home run and they don’t seem concerned enough with striking out.

@Melissa, You are absolutely correct, Trump faced bankruptcy over one of his casinos.
@Robert-I agree, it’s one thing to take some risks, but its important to cover yourself when things don’t go as planned.
@Bret-You highlighted my personal style; I’m a fan of striving to be a consistent singles hitter. Home run hitters are too high risk high reward strategies for my taste.

Here’s my problem with the typical psychology of the rich or high income earner. The failure to recognize that it could all come to an end very quickly…I suffered from this for awhile, but got wise a few years ago. Leverage is extremely powerful…it’s like the saying absolute power corrupts absolutely. A person who has been succesful using leverage becomes addicted to it. Before long, they know of no other way.

@Moneycone-Nice example. BTW, APPL is considering a offering a div:)
@Busy-Well put.. Enjoy the fruits of your labor, don’t take it for granted, and save for a rainy day. The rain hits everyone.
@Brent-Yea, what ever happened to cash? It’s a sure fire way to stay out of debt!
@John-So true, he Siegel hated being put on an allowance. I certainly wouldn’t like it. Hey, Last time I had an allowance I was a kid!

Unfortunately, there’s a paradox: its tough (perhaps impossible) to become a self-made billionaire without using leverage, and yet, leverage creates risk. In this case, that risk was realized. It’s easy to say in hindsight that the billionaire should have turned his sights away from growth and towards de-risking, but I can’t fault someone for being unable to predict the biggest market crash since the Great Depression, which led to his financial demise.

Hi Paula, Leverage is very useful in creating wealth. In fact, most homeowners have leverage and benefit from it with their mortgages. And, as you said, the future is unpredictable. But I think Siegel was too cavalier with his risk level!

Risk goes hand in hand with leverage so if you are not comfortable with the risk its better not to take on debt. Many real estate developers operate as LLCs or C Corporations which shields them from the debt of the company. When it is your own bank account that is at risk, most people are not so cavalier with their decisions!

@Paul, Life is risky and no one knows what the future holds. I wish we could protect against all forseeable risk, but that’s impossible. WRT to leverage, I think it’s best to maintain a carefully assessed amount of leverage, too much and there is just way too much risk.

Barb, I think you hit the nail on the head with the automatic transfers to build an emergency fund. That’s what I did and I haven’t touched it since I started building it! I never missed it either, because I never knew that part of my salary existed, from a spending standpoint. Hopefully I never have to touch it, but it is there if I need it.

I wonder how much Siegel should have had in his emergency fund, enough to cover all his construction loans? Or perhaps three to six months of operating expenses? As others have said, people like him are often leveraged to the hilt, and if they could borrow more, they would.

I would think that if you made that much money, you should be prepared to lose a good chunk of it at any time. Having that wealth would mean that you are more open to lawsuits or extortion. And the upkeep of that money has to have a windfall too.

@Lance, Once the automatic investing and saving starts, you really don’t miss the money, and you don’t need to worry so much about money!
@Bryce- For people like Siegel, I’d suggest watching how much they borrow and look at worst case scenarios before over leveraging.And billionaires should probably have at leas a million in an emergency fund!
@Michelle- Definitely true that when you’re dealing in finances on such a large scale, the risks are outsized as well!!

What a wake up call! Even high net worth people can hit the skids. What a story. I’m going to redirect more funds into my emergency fund right now. Do you have a good guideline for what’s a good amount? Thanks!

Everyone could do with an emergency fund, moreso the billionaires since they suffer the same emergencies we do only maybe at a more massive scale!
I try not to dip into my e-fund as much as possible and keep putting away small amounts from each paycheck to grow it. Consistency is what has helped.

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